Abstract
This paper presents a contracting model of governance based on the premise that CEOs are the main promoters of governance change. CEOs use their pow-er to extract higher pay or private benefits, and different governance structures are preferred by different CEOs as they favor one or the other type of compen-sation. The model explains why good country-wide investor protection breeds good firm governance and predicts a "race to the top" in firm-governance qual-ity after the Sarbanes-Oxley Act. However, such governance changes may be associated with higher rather than lower CEO pay as CEOs substitute away from private benefits. The model also provides an explanation for the observed correlation of CEO pay and firm governance as driven by CEO power.
| Original language | English |
|---|---|
| Pages (from-to) | 417-452 |
| Number of pages | 36 |
| Journal | Annals of Economics and Finance |
| Volume | 14 |
| Issue number | 2A |
| Publication status | Published - 2013 |
Keywords
- CEO compensation
- CEO power
- Corporate governance
- Investor protection
- Moral hazard